ICT Group, Inc. Q1 2009 Earnings Call Transcript

May. 1.09 | About: Sykes Enterprises, (SYKE)

ICT Group, Inc. (OTCPK:ICTG) Q1 2009 Earnings Call Transcript April 29, 2009 4:30 PM ET

Executives

Betsy Brod – MBS Value Partners, LLC

John Brennan – Chairman and CEO

Vincent Paccapaniccia – EVP and CFO

Analysts

Howard Smith – First Analysis

Bob Evans – Craig-Hallum Capital

Josh Vogel – Sidoti & Company

Bill Sutherland – Boenning & Scattergood

David Koning – Robert W. Baird

Shlomo Rosenbaum – Stifel Nicolaus

Matthew McCormack – Brigantine Advisors

Operator

Greetings and welcome to the ICT Group Incorporated first quarter 2009 earnings conference call. (Operator instructions) It is now my pleasure to introduce your host, Ms. Betsy Brod of MBS Value Partners, LLC. Thank you Ms. Brod, you may begin.

Betsy Brod

Thank you, operator and good morning everyone. Thank you for joining us for today's first quarter conference call with the management of ICT Group. Since we'll be discussing certain forward-looking statements during today's conference call that are subject to risks and uncertainties including those related to ICT Group's future revenues and earnings projections, the company claims protection of the Safe Harbor forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Now, I'd like to turn the call over to John Brennan, Chairman, Chief Executive Officer and President of ICT Group. John, you may begin.

John Brennan

Thank you, Betsy and good morning everybody. With me this morning is Vincent Paccapaniccia, our Executive Vice President of Finance and our Chief Financial Officer. I'd like to thank everybody for participating in today's call.

I'll review the highlights of ICT Group's first quarter performance including key operating and business development initiatives. Vince will then go over the details of our first quarter financials and present our guidance for the second quarter 2009. I'll follow up with the outlook – our current outlook for the balance of 2009 and then we’ll open the call for questions and answers.

Regards to our first quarter performance, I'd just like to start by saying we posted a very solid first-quarter despite the ongoing challenges in the business environment and continued strong currency headwinds that we face. I think sure you remember, we announced last quarter that we are exiting the market research business limiting our North American financial telesales operations and expanding our right-shoring strategy to our international operations.

On discussing the performance for the quarter, talking about revenue and the new metrics that we added last quarter, core business revenue, which encompasses North American customer care technology and BPO services as well as our international operations. This will give you a better look at how we are doing after the change in order to evaluate our progress.

Total revenue for the first quarter was $96.1 million, which was slightly over the top end of our guidance range of $92 million to $96 million. This compares to 108.7 million we achieved in the first quarter of 2008. Approximately 60% of the year-over-year decline in first-quarter revenue can be attributed to FX rates.

For example, on a constant currency basis, first quarter ’09 total revenue was down only 5% compared to first quarter ’08. In fact, while exchange rates impacted by the strong US dollar in the first quarter of ‘09 which greater than we had anticipated at the beginning of the year and reduced the dollar value of foreign revenues we achieved in the quarter by approximately $1 million, more than we had previously projected.

We now expect the continued strength of the US dollar will impact foreign revenues for the balance of 2009 by approximately $4 million more than we previously projected. While total revenue was down, our core business revenue was up in the first quarter. Core business revenue was $91.5 million and represented over 95% of total revenue in the quarter versus $89.9 million or 83% in the prior year period.

If you look at this on a constant currency basis, our core revenue increased 10% over the prior year. This was stronger than 6% to 8% core revenue growth that we guided to for the first quarter. The share of work produced offshore for US clients as well as for clients we serve in high-cost international market such as Canada, Australia and United Kingdom increased during the quarter.

For the first quarter of 2009, 65% of production for US clients and 90% of production for international clients in these countries was reduced at our higher margin offshore facilities. This compares to 62% and 8% respectively in the first quarter of 2008. This helped to improve our gross margin ratio from 35.9% in last year's first quarter to 40.8% in this year's first quarter.

As you know we began to implement significant cost-cutting program in the middle of 2008, in January this year, we announced the second round of major cost reduction initiatives. By aggressive actions and strong expense controls, we were able to gain greater benefit from these actions in the first quarter with facilities, travel and staff expenses coming in below planned levels.

Capital expenditures were also kept below plan as we closely manage facility and workstation expansion plans. Looking forward, we expect to see modest increases for the balance of 2009 in the savings that we will achieve in each quarter compared to the first quarter, but these will be partially offset by investments we will make to support growth in our core business as the year progresses.

We will break even our pre-tax basis for the quarter which is well above our guidance range of an after tax loss of $0.04 to $0.08 per diluted share. Core business production volume was up very strong, up 16% year-over-year and 3% sequentially from fourth-quarter ‘08 indicating the strength of our business. However, total production hours were down 3% year-over-year and 4% sequentially as a result of a sharp decline in production volumes from our non-core businesses.

Our balance sheet is solid with no debt and net cash at $37.6 million at the end of the quarter. Free cash flow for the first quarter was $4.7 million. Based on our first quarter performance and the moment we are building, we are confident that our decision to focus our resources on the core business we provide in North America to accelerate the implementation of our right-shore strategy for the other high cost markets we serve and to build our Latin American operations to serve local country markets while simultaneously providing a alternative offshore capacity for North American and European clients was the right strategy.

We now believe we have stabilized our business by realigning infrastructure costs to support growth in our core business, while significantly reducing our exposure to more volatile non-core business. In order to better position the company for renewed revenue and earnings growth, we've implemented several important initiatives over the past six to 12 months in addition to cost-cutting. They include adding seasoned management to lead our Canadian operations as well as our US commercial customer services operations as well as our first party collections business.

We upgraded our sales team with the addition of senior sales executives who have industry and application-specific knowledge and plan to opportunistically add another three or four over the next six months. In addition, we’ve built an aggressive lead generation group in Manila, which is supporting both domestic and international sales organizations. We are expanding our sales efforts into new sub-sectors of our targeted verticals including hospitals and the state and local government market.

In addition, we are expanding our service offerings within our targeted verticals. Examples include claims adjudication, patient access management, and medical detailing services for healthcare clients, loan modification and credit card collection services for financial services clients, and collections and provisioning services for telco clients. Our core business growth in the first quarter was driven by our success in the financial services and telco technology sectors which I will address.

In the financial services sector, we work with many of the strongest names in the industry and have increased our customer care collections and BPO work for them. The core business revenue for this group represents almost 90% of the total revenue for the sector in the first quarter of 2009 compared to 66% in the year ago quarter. We've been able to profitably grow this business despite the challenges facing the financial services sector in the US as well as worldwide.

Core revenue from this sector increased 22% in the first quarter of ’09 compared to the first-quarter of ‘08 when measured on constant currency basis, and core production volumes increased even faster at 32% during this period, that's a greater percentage produced offshore at lower rates. We are seeing strong growth in all segments of our core financial services offerings and first quarter sales wins in this sector were equally distributed amongst about one third for customer care applications, one third for first party collections applications, and one third for a variety of BPO applications.

Based on the diversity of these wins, we believe we are achieving strong enterprise selling success in this sector. In the telco technology sector, core production hours increased 13% on a year-over-year basis and 6% sequentially, reflecting the growth of work in North America and the Philippines where new and expanded programs for US, Canadian, UK and Australian clients.

On a constant currency basis, core revenue from this sector was up 15% on a year-over-year basis and 6% sequentially. We are now servicing a broad range of wireless, cable and Internet service providers offering as well as supporting computer, communications, and consumer electronic products for a wide variety of suppliers around the globe. Healthcare sector revenue has leveled off at about $10 million to $12 million per quarter, as the decline in health insurance business which is now being impacted by higher unemployment rates and a drop in subscribers is being offset by increases in certain programs, the pharmaceutical companies that we support and the launch of our patient access management services for hospitals.

Finally, we (inaudible) expansion of opportunities in the government sector which we are pursuing on our own, as well as in partnership with large federal contractors. As I mentioned earlier, we've also begun exploring opportunities at the state and local level particularly in states where we have staff and operations in place where we could be more competitive. I would now address the business development trends as we see them and first off talk about decision cycles.

Decision cycles are still long, but we are seeing faster decision-making in the financial services sector so far this year and we saw in the second half of 2008. Regard to new business wins, we were awarded approximately $20 million of new business in the quarter measured on an annualized basis when fully rolled out, but half of the wins came from financial services clients and the other half from telco clients, and all the wins were from existing clients.

Approximately 8% of the work for this new business will be carried out in our offshore facilities in Asia and Latin America. The market environment, while challenging is having a mixed impact on our business, but in general, I believe there is more positive and negative. Companies are increasingly looking to outsource more of their non-core functions to reduce cost and they continue to prefer lower cost offshore solutions. Increasingly, they are looking for a second offshore geography particularly Latin America, so as not to put all their eggs in the Asian basket.

We believe we are well positioned to take advantage of this trend by having Asian alternatives in India and the Philippines, and Latin American alternatives in Mexico, Costa Rica and Argentina. And lastly, I would just like to say that pricing pressure has not changed significantly and in a few instances over the past three, six months, we've been able to raise prices. Does not appear to be much overcapacity offshore and very little excess capacity in North America as most companies have right-sized their North American footprint.

At this point, I will turn the call over to Vince.

Vincent Paccapaniccia

Thank you, John. For your reference, reconciliation tables for non-GAAP financial measures and quarterly call volume statistics may be found at the company's website. In addition, my discussion of gross margin, EBITDA, operating profit, pretax income and net income as well as diluted earnings per share for the first quarter of 2009 is before the reversal of previously recorded charges which I will address separately.

As John noted, we made important progress in improving the company's profitability, strengthening our balance sheet and enhancing our liquidity during the first quarter of 2009. Total revenue for the first quarter of ‘09 was $96.1 million. Core revenue which excludes market research, and U.S. and Canadian financial Telesales totaled $91.5 million remaining relatively flat sequentially and increasing 2% compared to $89.9 million in the first quarter of 2008.

On a constant currency basis, core revenue increased 10% year-over-year and comprised 95% of total revenue. Non core revenue for the first quarter of 2009 was $4.6 million declining 53% sequentially and 76% compared to $18.8 million in the prior year. Adjusted gross margin was 40.8% in the first quarter of 2009, increasing approximately 520 basis points versus the first quarter of 2008.

While more favorable foreign exchange rates, principally the Philippines peso, accounted for approximately one third of this increase, the higher amount of work produced offshore and improved productivity in the United States were significant contributors to this improvement. The first quarter 2009 represents the fourth consecutive quarter of gross margin expansion.

First quarter 2009 adjusted EBITDA increased 29% year-over-year to $6 million or 6.2% of revenue, resulting in adjusted operating profit for the first quarter of 2009 $41,000. During the first quarter of this year, the Philippine peso weakened against the U.S. dollar by approximately 14% versus the first quarter of last year. This year’s impact of changes in foreign exchange rates inclusive of our hedging program was comparable to the impact we experienced in the first quarter of 2008.

In this year's first quarter, Philippine peso denominated costs comprised 21% of the company's consolidated cost structure. Wage inflation in the United States and Canada was in the low single digit range and was in the mid-single digit for the Philippines for the first quarter of 2009 versus the prior year quarter.

Net interest expense of $25,000 in the first quarter of '09 increased versus the first quarter of '08, net interest income of $122,000 primarily due to higher amortization of deferred financing charges for the credit facility combined with lower interest rates in our cash balances. Adjusted pre-tax income for the first quarter of 2009 was $16,000 [ph] and for the first quarter of ’09, we recognized $105,000 of income tax expense associated with countries where we generated taxable income.

At the projected 20% effective income tax rate, adjusted net income would have been breakeven. The first quarter 2009 financial results reflect the impact of share based compensation of $671,000. This compares to $532,000 in the first quarter of 2008. I would like to update everyone on our continuing cost reduction efforts. We made significant progress reducing our infrastructure cost during the first quarter. We continue to focus on new ways to reduce our costs and we have now increased the $15 million of annualized cost savings that we announced last quarter to approximately $16.4 million in annualized cost savings company-wide.

Due to the implementation of the previously announced cost savings, in combination with these additional savings, we realized approximately $3 million or 75% of these savings in the first quarter of 2009. We expect to realize approximately $3.5 million from those savings in the second quarter of ‘09 and we plan to continue these efforts to reduce our cost structure going forward.

And now, I will address the reversal of previously recorded charges. During the first quarter of 2009, the company negotiated an early termination of a lease of a facility that was previously written off and we also reversed a small portion of the severance accrual that was reported last year. We offset most of this gain by consolidating a small US center into another facility during the quarter. The net gain from these actions resulted in $85,000 of income from reversing restructuring charges that were previously written off. At March 31, we have 12,523 work stations in operation, remaining basically flat with those in operation at year-end.

Now turning to the balance sheet, at March 31, cash and cash equivalents totaled $37.6 million which represented a sequential increase of $6.3 million and the company remained debt free. Approximately two thirds of our March 31 cash balances were maintained in international locations, where we would incur additional taxes as we repatriated those funds to the US. We continued working with our customers regarding timely payment of our receivables and we were able to decrease our day sales outstanding from 60 days as of December 31 to 57 days at March 31.

In the first quarter 2009, property and equipment purchases totaled $2.6 million or 2.7% of revenue. Capacity utilization for the US and Canada increased from 64% in the first quarter of 2008 to 71% in the first quarter of '09. Capacity in the Philippines remains over 90% utilized. Total company first quarter 2009 capacity utilization was 79% representing a six-point increase versus the first quarter of 2008. We generated $7.3 million of cash flow from operations in the first quarter of this year and free cash flow totaled $4.7 million.

During the first quarter of 2009, we made payments totaling $2.6 million for restructuring charges that were recorded in the prior years. I will now turn to guidance. The company plans additional downsizing of local country operations for certain of our international units, which is expected to result in charges in the second and third quarters of this year. The total amount of these charges is not expected to exceed $1 million. All guidance discussed below is before any such charges.

Core revenue for the second quarter of 2009 is projected to remain comparable to or up modestly compared to the first quarter of 2009 and projected foreign exchange rates are expected to result in approximately $8 million less core revenue in the second quarter of ‘09 compared to the second quarter of the prior year.

On a constant currency basis, second quarter 2009 core revenue is projected to increase by 6% to 8% year-over-year. Non core revenue in the second quarter of '09 is expected to decline by approximately 70% versus last year, remaining relatively flat compared to the first quarter of 2009.

Total revenue for the second quarter of 2009 is projected to be comparable to or increase modestly compared to total revenues for the first quarter of this year. Full year 2009 core revenue is projected to grow by mid single digits compared to calendar 2008.

Projected foreign exchange rates are now expected to result in approximately $25 million less core revenue in full year 2009 compared to 2008 as the US dollar continues to remain stronger than we anticipated earlier. On a constant currency basis, 2009 core revenue is projected to increase by 8% to 10% year-over-year. Full year 2009 non core revenue is projected to decline by approximately $35 million on a year-over-year basis.

We currently project combined U.S. and Canadian capacity utilization to increase to the mid 70s during 2009 and to maintain the high levels of capacity utilization in the Philippines as we expand into the provinces. We continue to hedge six forward quarters for the Philippine peso and we currently are 75% hedged for calendar 2009 at approximately 45 and about 35% hedged for calendar 2010 at just under 50.

Within this challenging business environment, we are redoubling our commitment to cost reductions and capital preservation. For 2009, we expect to keep capital expenditures to approximately 4% of revenue. The effective income tax rate for 2009 is still expected to approximate 20% for the full year. However, we continue to anticipate that quarterly income tax rate will fluctuate based on the geographic distribution of the company's profit in each respective quarter. We project that our pre-tax profit for the second quarter of 2009 will be similar to or modestly above the adjusted pre-tax profit we recorded in the first quarter of 2009.

And now, at this point, I would like to turn the call to John.

John Brennan

Thank you very much, Vince, and I will now provide with a brief outlook for 2009 full-year outlook. As we said in our fourth-quarter ‘08 conference call with you in February, we expected the challenging business environment will continue throughout this year and currency headwinds may be even stronger and longer than previously anticipated. However, we believe the global business slowdown is driving clients to outsource more of their infrastructure costs. We also believe that ICT Group is well positioned with both onshore and offshore solutions, and we expect future growth of our low priced offshore solutions and call center based and home-based agents onshore solutions.

Our internal projections call up for positive year-over-year growth in core business revenue throughout 2009. Much of the new business we need to capture to achieve that objective has already been won and prospects with initial wins are good. On the cost side, our operating leverage will be achieved through increased productivity and greater workstation utilization. This will help enable us to improve our profitability for every incremental sales dollar. We will continue to constrain capital expenditures in 2009 as Vince just mentioned, so as to maximize cash flow and to maintain good liquidity.

And in closing, I would like to say that we remain cautiously and increasingly optimistic about ICT Group’s prospects for 2009. Thank you.

At this point in time, we will open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Howard Smith of First Analysis. Please proceed with your question.

Howard Smith – First Analysis

Yes, good morning and congratulations on improving results and looks like a stable operations here. As we look toward the rest of 2009, I was wondering if you could comment on new logo initiatives. You had some bookings in the first quarter, but not from new logos and should we expect that to be material part of the booking going forward this year?

Vincent Paccapaniccia

At the last call, Howard, we indicated that we expected 75% of our new business wins this year would come from existing clients. It's obviously – especially in this environment, it’s becoming easier to cross sell, especially the additional services we now offer to existing clients primarily in the financial services sector but also in the telecommunications sector where we’ve broadened the number. Right now so far in this quarter since the end of – we're pretty far long with, again additional sales to, I'll call it, existing clients. We have some new programs that we are rolling out, we have brought in some, as you call, seasoned sales executives from the industry who have contacts in, I'll call them other potential clients and we are working those aggressively. But I would believe that 75% to 80% of our business this year in terms of new business wins will come from existing clients.

Howard Smith – First Analysis

Okay. Thank you.

Vincent Paccapaniccia

Very good [ph].

Operator

Our next question comes from Bob Evans with Craig-Hallum Capital. Please proceed with your question.

Bob Evans – Craig-Hallum Capital

Good morning everyone and nice to see the improvement as well.

Vincent Paccapaniccia

Thank you, Bob.

Bob Evans – Craig-Hallum Capital

Can you – a couple of details that I may have missed while you were going through them. First on the seats, can you give us a little bit of a regional breakout of where they're at right now on a companywide basis?

John Brennan

Pretty close to where they were last time around.

Bob Evans – Craig-Hallum Capital

Okay, refresh my memory.

John Brennan

Okay. We have about 3,200, a little bit over that in the United States, about 2,100 in Canada, about 5,000 in the Philippines, about 1,700 in Latin America and the combination between Europe and Australia we have about another 475 [ph].

Bob Evans – Craig-Hallum Capital

Okay. And if we get to the end of the year, what should be the net-net – what's your net-net additions?

John Brennan

We are currently estimating that we will be somewhere between – will be over – we are at about 12,500 today and will be over 13,000. Net-net additions will be somewhere between 500 and 1000, but probably somewhere in the middle of that.

Bob Evans – Craig-Hallum Capital

Okay. And will most of those will be offshore?

John Brennan

Most of them will be offshore primarily in the Philippines and in Latin America.

Bob Evans – Craig-Hallum Capital

Okay. Do you expect – how much seat contraction do you expect through the year? I know the net-net is 500 to a 1000, but I don’t know how many does that mean you're going to really add 1500 and take that 500?

John Brennan

We don’t expect much this year. We will be – as Vince just mentioned, we will be consolidating some of our, I'll call it, our international capacity, but they were talking about 100, 150 seats probably at most. We don't expect any significant contraction in the US and Canada, we have although I mentioned this time about 80% of the new sales that we have in the first quarter was for offshore capacity, the current – I would say close to closing business so far in the second quarter, it’s about 50-50 between onshore and offshore. So really – I think we got a pretty good balance here, we don't have any major closings planned for the US or Canada. There's one center that the lease is expiring in the middle of the year in Canada. That’s about the only downsizing that we'd see.

Bob Evans – Craig-Hallum Capital

Okay. And if – can you give us a sense on the competitive environment, how are things now? Are you – are you seeing any level of consolidation? Is the sales cycle, would you say it longer, shorter, I know you said financial services was may be a little shorter, but what about other sectors?

John Brennan

Well, with the (inaudible) last quarter being in the telco or the financial services – financial services seemed like though from October to December, people just stopped making decisions that are – and we have seen those decision processes move forward faster. I don't think we are indicative of a statistical sample of how past things are moving, but I think it is even in the telecommunication and technology space, especially if you have an existing relationship, we are seeing – I'll call it a faster decision cycle. When we get into pharmaceutical and government and insurance arenas, it seems like not much has changed. There's a lot of activity, but not a lot of quick decisions.

Bob Evans – Craig-Hallum Capital

How would you characterize pricing – stable, getting better, getting worse?

John Brennan

I think pricing is stable. As we mentioned, we have been successful in a couple of clients in the past three to six months of raising prices, I would say it’s still aggressive. I think there's still a lot of competition. I (inaudible) think there's been a lot of consolidation. As we've moved out of, I'll call it at least downplayed reduced significantly our financial telesales business, we are – from a competitive point of view, most recently running into a, I will call it, a TeleTech and a Convergys and a Teleperformance, and the more customer service focused large players of the market.

Bob Evans – Craig-Hallum Capital

For which type of deals? I am sorry.

John Brennan

For the customer care type activity as well as the BPO activity, we were running into (inaudible) competition as well.

Bob Evans – Craig-Hallum Capital

Okay. And on the cost side, I think you said, you are increasing your cost cutting, where it’s 16 million for the year, is that right?

Vincent Paccapaniccia

That’s correct Bob, 15.4 million as annualized cost savings.

Bob Evans – Craig-Hallum Capital

That’s up from–

Vincent Paccapaniccia

15 from last quarter.

Bob Evans – Craig-Hallum Capital

Okay. And that difference is mainly due to–

Vincent Paccapaniccia

One was this center we addressed. We did shut the center down.

Bob Evans – Craig-Hallum Capital

Okay.

Vincent Paccapaniccia

And you are going after other process we go through, we have a group in place that focused on cost reductions. It's spread. It's interdepartmental. It's across all the departments of the company and all our geographies, and everybody is working on new and different ways to go out and identify and implement cost savings.

Bob Evans – Craig-Hallum Capital

Okay. And your gross margin trend has been good over the last couple of Q2 quarters, how should we think about that sequentially through the year. Do you continue to see kind of continued sequential improvement in gross margin?

Vincent Paccapaniccia

Yes, the gross margin ratio will continue to grow. I think it will be growing more limited, not – I'm talking about the 500 points that we saw on a year-over-year, it’s more like the 30% [ph] we saw sequentially.

Bob Evans – Craig-Hallum Capital

Sure.

Vincent Paccapaniccia

I think it will grow into the 41 – low 41 that we progress through the next three quarters.

Bob Evans – Craig-Hallum Capital

Okay, all right. And capacity, I am sorry, you had – what’s your overall companywide capacity utilization for the quarter?

Vincent Paccapaniccia

79.

Bob Evans – Craig-Hallum Capital

79. Okay and that can be at what level by the end of the year?

Vincent Paccapaniccia

I think that will move into the low 80s.

Bob Evans – Craig-Hallum Capital

Okay. All right, thank you.

Vincent Paccapaniccia

Thank you, Bob.

Operator

Our next question from Josh Vogel with Sidoti & Company. Please proceed with your question.

Josh Vogel – Sidoti & Company

Thank you. Good morning, John and Vince.

John Brennan

Hey, Josh.

Josh Vogel – Sidoti & Company

We saw some nice improvement in the DSOs, and I was just wondering if this was a favorable timing or you starting to improve on the collection front?

John Brennan

We are working very diligently on the collection front, we always do, and we are probably increasing our efforts in this environment, Josh. I think 57 is probably a record for the company and I can’t remember any time we were ever at this level. So I would say we are working it harder. The great news is, we have a great group of customer base, so we are able to work where there is not a lot of cash issues that we have out there, so just improving our billing process and we’ve been able to communicate better with our customers.

Josh Vogel – Sidoti & Company

Okay. So you are seeing no collection issues from any of your clients and are you doing anything with the bad debt expense?

John Brennan

I won’t say none, but I would say it’s very limited. Regarding bad debt expense, we did talk about that we had a small charge in the fourth quarter of 2008 related to a company that did go in liquidation, it was couple of hundred thousand dollars. But in 2009, I would say no significant events from a bad debt perspective.

Josh Vogel – Sidoti & Company

Okay, great. And I know you were discussing the sales cycle and program round [ph] schedules, but I was wondering if you could just quantify in terms of actual length, what the sales cycle historically was and what it is today, maybe – especially in financial services, in terms of maybe how many months from start to finish?

John Brennan

I think if you look at it two years ago was for a reasonable size contract it was probably in the three to six month range. We did see some activity last year, we probably – it got polarized. For companies that were in an aggressive cost-cutting mode in the financial services sector, they – some would not even put things out to bid that if you already had an operation and even if it wasn’t the same application, they would call up and just see, do you have capacity to do collections for us or do back office work or customer service. So in some ways, there were some of that going on and I would say that was probably in the earlier part of the year and then in the latter part of – from September, October, probably we came, you didn't know when it was going to happen, they were stretching six, nine months. Decisions that we thought were going to happen in the fourth quarter didn't happen.

And now I mean one of the more recent ones we've gone through is a – was a significant financial services company that I would say it's back to about 90 days cycle – it seems one of the more aggressive ones that I've seen in the past years for a large contract opportunity. And I would say I know it started in the early part of the first quarter, and decisions will be made within the next couple of weeks. So I think it's getting back to normal range of three to six months from all over the place, depending on what the need of the institution, whether they are at a rapid cost-cutting mode or a decision paralysis mode last year.

Josh Vogel – Sidoti & Company

Okay. That’s helpful thank you. And just lastly I know the bulk of your cash is located in the international operations, but I was just wondering if you had any shorter term or even long term strategy of how you wanted to utilize this cash.

Vincent Paccapaniccia

Right now Josh, our plan and our processes are driven to use the offshore cash for future offshore development. If we continue to grow in the Philippines, we talked about how we will be adding over 500 seats there in the remaining three quarters of 2009 and further Latin American expansion. It's right now earmarked for international development.

Josh Vogel – Sidoti & Company

Okay and these would be build-outs on year-end versus maybe acquisition?

Vincent Paccapaniccia

I was talking about build-out; that's correct.

Josh Vogel – Sidoti & Company

Okay. Thank you very much.

Vincent Paccapaniccia

You’re welcome.

John Brennan

Thanks, Josh.

Operator

Our next question comes from Bill Sutherland with Boenning & Scattergood. Please proceed with your question.

Bill Sutherland – Boenning & Scattergood

Hi, thanks. Good morning. A little help with my math, Vince, if you would. Just wanted to understand what you said about the gross margin because I see Q1 I think was 40.8% and maybe, is that right?

Vincent Paccapaniccia

Yes.

Bill Sutherland – Boenning & Scattergood

Okay. And you said, what kind of number could be feasible as you work your way towards the end of the year?

Vincent Paccapaniccia

I would think it can move into the low 41, Bill.

Bill Sutherland – Boenning & Scattergood

Low 41, so okay. And when you look at your cost saving initiatives that are going to get realized in the second quarter, and I guess that will get you to the end of that program? Is that correct?

Vincent Paccapaniccia

We'll be probably running 100% of the run rate by Q3.

Bill Sutherland – Boenning & Scattergood

Okay and then that falls into more of the direct line or?

Vincent Paccapaniccia

More of SG&A.

Bill Sutherland – Boenning & Scattergood

More SG&A. All right. Now remind me what core revenue was for full year ’08?

Vincent Paccapaniccia

The revenue for full year 2008 was 370.

Bill Sutherland – Boenning & Scattergood

Okay, just want to figure out based on the percentage goals you've got for growth there. And then, a little help with the quarterly phasing this year because you're not going to realize a material pickup, it sounds sequentially Q2 over Q1. So can you give us a broad-brush feel for second-half at all as your cost initiatives get fully realized and I guess based on these – yes, go ahead, I'm sorry.

John Brennan

Yes, I would say we have not, as you are aware we have not given out full year guidance. We still think it's a little bit of a troubling environment or uncertain environment here regarding quarter out of quarter, we believe we will increase revenue and profitability on a quarterly basis, certainly measuring constant dollars and we're not quite sure about what dollar is going to do, but so we would expect we're ramping up programs as we speak both offshore as well as onshore, and we believe the non-core business is pretty much stabilized. I think it came in maybe 1 million to 2 million less than anticipated in the first quarter, and the core business come in $2 million or $3 million more than expected. So really it’s a – it's a moment thing as we build these non-core business and although the wins are happening, and it's a matter of how they ramp up on top of the business we have and a lot of companies is talking about the – this uncertainty with, I would think a minority of our programs with some of them are large – really there is some uncertainty with call volumes, the volumes we were receiving versus what was anticipated, but I would say about 70% to 80% of the programs we're running are maintaining consistency with projected call volumes. I don't think there is anything exceeding – the only ones that are exceeding call volumes are those associated with the mortgage refinancing. So we've gotten a lot of good bumps on that side of the business.

Bill Sutherland – Boenning & Scattergood

And where have you seen the most inconsistently?

John Brennan

I think inconsistently has been in the areas of consumer products and – we're seeing it with some of our telco suppliers or clients, and it really depends on a number of factors, we don't know what the total call volume is in most cases, so it can be an allocation issue, it can be a – I know in some cases, it – they are getting fewer call volumes and fewer calls. I think a lot of them are aggressively looking at ways of reducing calls through technology and greater use of their – of IBR, so it saves some cost on their customer service side. So there's that is probably the two areas. Consumer – we did see a decline in call volumes in the insurance area, I mean the health insurance clients. They're having some declines in subscribers as people move on to unemployment. We're seeing a little bit of it there as well, but I would say again probably 75% to 80% if I looked at it client by client, which we did do before the call. It's been maintaining a pretty consistent behavior.

Bill Sutherland – Boenning & Scattergood

So if non-core kind of stabilizes here, I know it's principally telesales, what – as you get to the end of this year I guess what is the ratio of core to non-core at that point, Vince?

Vincent Paccapaniccia

It’s about 95% call rate now, I think it will be – that's the first quarter. 95% of total revenue was core. I mean I think it's just going inch up from there.

Bill Sutherland – Boenning & Scattergood

Okay. And – I didn't hear, maybe I have missed it, any sort of specifics on international consolidation and rationalization is a focus that's still you want to make some progress on, can you give us a little color there?

Vincent Paccapaniccia

Yes, it's varied by country. Our operations in Mexico continue to be quite profitable. The absolute profit amount got reduced because of the dramatic drop in the value of the Mexican peso during the quarter, which we had not anticipated. Dropped about 20% I think, between the end of the year and

John Brennan

Close to 25.

Vincent Paccapaniccia

Close to 25 of the quarter, but the business there still remains strong and profitable. It has improved to close to breakeven or breakeven on a direct contribution basis in Argentina and Australia, and we are having, I will call it, issues in the UK market and I have to say one of the benefits what we are seeing is that an increasing portion of our business for Australia and the UK and, to a lesser extent Canada are opting for offshore solutions following the trend of what’s happened in the US over the last several years. So there we don't have a lot of in-place capacity and our goal is to primarily sell offshore capacity.

Bill Sutherland – Boenning & Scattergood

How would you characterize the demand side in the UK, John?

John Brennan

It’s weak. We’ve added some additional salespeople, but it has been weak.

Bill Sutherland – Boenning & Scattergood

Okay.

John Brennan

(inaudible) It can't get much weaker.

Bill Sutherland – Boenning & Scattergood

Yeah, that's the only good news. Okay. Thanks.

John Brennan

Thank you, Bill.

Operator

Our next question comes from David Koning with Robert W. Baird. Please proceed with your question.

David KoningRobert W. Baird

Yes, hey guys, a nice job. It seems like things are getting back on track here.

John Brennan

Good morning, David. Thanks.

David KoningRobert W. Baird

And I guess, first of all, you didn't make a lot of comments about full year guidance, certainly understand that, but I guess I'm wondering if we should expect kind of the normal pattern where the second-half revenues generally are little better than the first-half. And then second, we're using the back half, you get margins that are a little better than the first-half, and this year seems like we might also get the benefit that some of the peso hedges start rolling off. You get more attractive hedge rates maybe later this year and then definitely into next year. So I'm wondering if directionally some of those – kind of how you think it might play out a little bit.

John Brennan

Yes, David. I think on pretty much across the board here, I think you're hitting the highlights. As you know, we have not provided any guidance for quarters three or four or full year, but directionally we do see revenue growth sequentially for each of the quarters, I think you're right across the board from that perspective. Secondly, as you look at the margin expansion, we are really focused on maintaining our SG&A cost, we are trying to look at what kind of cost reductions we can put in place to offset the investments we need to make to drive the core growth, so we are trying to maintain G&A as flat as possible, so that’s the intent of those actions. And we do see a small – continuing to control the increase in our gross margin and this does include the fact you mentioned which is Philippine pesos as even though – 75% of this whole year hedged as we do get into the second-half and even more importantly the fourth quarter, you will see some more favorable hedges or less in the 35 range coming into play, which will start benefiting the gross margin and the G&A to a lesser extent.

Vincent Paccapaniccia

I think, just to add, the forward direction of the company is that by keeping expenses under control, keeping the improvement in the gross margin ratio, it's all about growing top line revenue and that's the focus of the company and we do believe we will continue to grow it. I think it's somewhat – there's some uncertainties as to exact volumes we are going to get and what additional business we will close, but we feel confident that we will be improving our top line and I guess provided (inaudible) million dollars of top line, it’s about $0.02 a share if we keep everything else constant below the line. So that’s where we're headed and it's just a matter as to how fast we’re going to improve that top line.

David KoningRobert W. Baird

Okay, good. And I guess one other thing, it looks like this quarter as a percent of reps, it look like SG&A was a little higher than normal. I guess I'm wondering what contributed to that, did that has something to do with the gross profit getting better because of some offshore things that SG&A gets a little worse and does it sound like you do expect that as a percentage of revenue to stay pretty confident through this year.

Vincent Paccapaniccia

What I was talking about, David, is actually I'm thinking that dollar amount for SG&A is going to pretty confident as we progress through the remaining quarters of ’09. We did $39 million (inaudible) between $39 million and $40 million as a dollar amount as a percent of revenue, that’s our target. Sequentially as you can see, SG&A went down about $1 million, but I think the large decline in the non-core revenue did make the SG&A ratio to total revenue rise a little bit. I mean that is absolutely correct.

In this first quarter, I guess there were two things of note, number one is, even with the first quarter sequential items, we typically see professional fees, payroll taxes, things along those lines – we still were able to corner a $1 million sequential decrease. And then second component is the FX impact. As you may recall, as I know you're intimately familiar with our 10-Qs, we record the favorable Philippine peso benefit in cost of services. However, we record 100% of the hedge impact in SG&A. So in the first quarter of ’09 and you will see this in Q2, and to a lesser extent in Q3 – there is a charge in the first quarter of 2009 as it relates to the Philippine hedges that kind of offset some of the benefit you see up in the cost of services, and that would also add to the SG&A ratio to total revenue.

David KoningRobert W. Baird

Yes, okay. That totally makes sense. That’s great. You made some comment about Q1 benefiting from 3 million or so of cost reductions, is that a $3 million annual cost reduction meaning 750 [ph] here in Q1?

Vincent Paccapaniccia

No, 3 million would be the impact in Q1. So this $1 million sequential decline would be – those $3 million that we have in cost savings there and we did spend an additional $2 million between the first quarter sequential cost and investments in the quarter.

David KoningRobert W. Baird

Okay. And then we said 3.5 million in Q2, that would mean an incremental 500,000 sequentially?

Vincent Paccapaniccia

That’s correct.

David KoningRobert W. Baird

Okay. And then I guess the last thing is D&A has been ticking down. Is that just a function of I guess closing some of the centers, so it's just less stuff to depreciate?

Vincent Paccapaniccia

Primarily, yes, and we did have – the write off we took in the second half of 2008, we did write off some assets there which did decrease our D&A. That’s correct.

David KoningRobert W. Baird

Okay. Great, nice job.

Vincent Paccapaniccia

Thank you.

John Brennan

Thank you.

Operator

Our next question comes from Shlomo Rosenbaum with Stifel Nicolaus. Please proceed with your question.

Shlomo Rosenbaum – Stifel Nicolaus

Hi, guys and I want to add my congratulations and things are starting to stabilize for you.

John Brennan

(inaudible).

Shlomo Rosenbaum – Stifel Nicolaus

I want to just ask a little bit on CapEx, it has been tending down and you mentioned about 4%. Do you think you can hold it? Is 4% sort of a conservative number do you think you can hold that to a lower amount given that you are not going to be expanding as much this year?

Vincent Paccapaniccia

Yes, it's certainly possible. I'll put two parts of it out there Shlomo. As you know, we spend about 2% in October revenue as maintenance. It could be 1.5, 1.75, but I kind it kind of 2%. And we already spend 2.7 in the first quarter, so we are going to make our best efforts to invest this capital as – John talked about the revenue expansion in the second half of 2009. So as that revenue comes on line, we are trying to – very closely align the revenue growth with our capital expansion.

John Brennan

I think the other part on it, a couple of years ago Shlomo as we migrated work offshore, we were reducing revenues and creating capital expenditures to do work in the Philippines as we have been doing in the US. So we have to – to some extent to build out and we had workstation as we could use via licenses and so forth. So when we were up in the 6% range and north of that – now we're pretty steady state that as I mentioned, I think we went from 62% or 63% US business offshore last year to 65. So there is not like the double spending on CapEx that we had that. And so I would think that also would keep us at a lower point even to handle growth in the future.

Vincent Paccapaniccia

Our datacenters give us much better flexibility on reusing the assets that are deployed, absolutely.

Shlomo Rosenbaum – Stifel Nicolaus

Just moving on into business conditions, the signings of 20 million, you know it’s nice to begin new business just not at the levels that you seem to having been getting last year, was there any business that – in the quarter that closed after the quarter, sort of was timing or its just sort of that is the way things are right now.

John Brennan

I think it’s the – the way things are, I think the – we would expect to average about $20 million a quarter moving forward. We had a couple of significant quarters early last year and late in 2007. Some of that never materialized as part of the issue. As the programs ramped up, they didn’t believe – they didn't fully reach those levels. So I think for the size of ICT of $20 million, I think compared to about two years ago, we were averaging about 10 to 15 each quarter. So I think we had a – it’s a couple that just didn’t happen, we think they are going to happen in the second quarter, pretty close on them and at the other end of the – being most probably in the second quarter or drop off into the third quarter. So we have been looking at $15 million to $25 million range per quarter for this year.

Shlomo Rosenbaum – Stifel Nicolaus

Okay, so in your assessment, would you say the business conditions are kind of stabilized, I mean they are not getting any worse maybe not getting any better, but you don’t just sort of bouncing around in that level?

John Brennan

I don’t we call it bouncing around, but I think that has stabilized, I think the big drop in even referring to the earlier questions on the – we had a – between the first quarter of last year and this year, we had about 750,000 fewer hours in the non core business going from 1 million to about 250,000, and it dropped over 50% between the fourth quarter and the first quarter. And now that we have stabilized that non-core business and expect it to be running fairly steady based on and even if it drops a little bit might drop a $1 million a quarter as oppose to $10 million a quarter, some of the quarter last quarters. So from that end, we think we’ve stabilized our exposure. In terms of the call business, we think the North American core business is solid and growing and I think they mentioned to Bill Sutherland, our UK business is soft, weak, and it’s varying by country. Australia is having a good year and so we have some ups and down there. But I think the call business is pretty solid in terms of customer care, BPO and we are making a lot of inroads in the first party collections business with our financial services clients and we feel that’s – provide some upside potential for us this year.

Shlomo Rosenbaum – Stifel Nicolaus

And the plan for the UK is to try and migrate it to – more of the work to offshore locations? I mean UK has been kind of a sore point for a while.

Vincent Paccapaniccia

Yes, our plan in the UK and Australia in particular, are to really have a small footprint locally so you can have a presence that can show, because you're going to have to manage programs. From there, you're going to have a (inaudible) center that’s going to provide the switching, and you're going to have a sales organization. So we'll – we've cut back on the footprint – in those and capacity in those locations and the effort is on – in selling offshore. They have – Australia and the UK probably half their business this year will be done offshore primarily in the Philippines. So we are getting momentum there, but more momentum heavily out of our Australian operation and our UK operation today.

Shlomo Rosenbaum – Stifel Nicolaus

Okay, great. Thank you very much.

Vincent Paccapaniccia

Thank you.

Operator

(Operator instructions). Our next question comes from Matthew McCormack – Brigantine Advisors . Please proceed with your question.

Matthew McCormack – Brigantine Advisors

Yes, good morning. I wanted to go back to the SG&A line. I guess the question is over the long term on a ratio basis, what are you targeting for that and on a steady state basis and no FX, you’ve got all the cost cuts made, you’ve exited the non-core business, I think at ’06 you did that 33%, is it possible over the next few years to get back to the I guess the mid-30s level?

Vincent Paccapaniccia

If you're talking the next few years, like 2010, 2011, I would say I could see that pretty easily get into the mid-30s, Matt.

Matthew McCormack – Brigantine Advisors

Okay. And then John, you made the comment that there was not much overcapacity offshore, I guess could you elaborate on that? Are you starting to see some overcapacity, some speculative builds? Just any comments you could make about that would be helpful.

John Brennan

I think there's – and I'm really stretching here, and it's more on rumor and innuendo, but there's, to my knowledge since I’ve been told by our people in the Philippines that there is capacity available from certain suppliers, maybe 1000 seats or 500 to 1000 depending on how what’s happened with certain programs, I think there is a lot – I think that and it really depends on – what if somebody is transferring a client base from one country to another, whether its from India to the Philippines or from the US to the Philippines, then they generally don’t have much overcapacity, because they are filling the seats with existing business.

I think, overall, the growth in the business over the last 18 months, 12 to 18 months for offshore I think it has slowed down somewhat in the Philippines and it really depends on where the – where a particular competitor would be in this build out cycle. We typically are – we have to fund the lease and then we phase into build out and station heads as the demand dictates. So I think there is a lot of interest, its quite interesting not only with call center, but also IT outsourcing that we are hearing about of companies looking closer to home and looking in Latin America. And in that end of it, we are pretty much at capacity and contemplating do we pull the trigger on additional capacity in Mexico or Costa Rica or Argentina this year. So I think we are seeing a lot of demand in Latin America. So to some extent, it’s a moving target.

Matthew McCormack – Brigantine Advisors

Okay. And then given your capacity in Mexico, are you seeing or expecting any impact with this swine flu pandemic either possibly affecting the business there or higher cost associated with it?

John Brennan

We are not seeing anything so far. We are obviously tracking it. Quite interestingly, over the past weekend, we had our – and even on Monday and Tuesday – over the past four or five days, we had our highest volume days in the month which didn’t make sense to me that people are – can’t go anywhere also, they are going to work, but we certainly are – hoping it doesn’t materialize. If it's something more significant, we do have contingency plans in place as to what we could handle in other countries. About 30% of our capacity, 25% to 30% of our capacity in Mexico is used for offshore work for the US market. Some of it's bilingual. Some of it's English only. So we have plans in place as to how we could accommodate the US offshore work back into the US or to the Philippines, but as far as the Hispanic work, it would have to be carried out in Cost Rica or Argentina as alternatives. So that's the plan, but to date there has been no effect.

Matthew McCormack – Brigantine Advisors

Okay, great. Thank you very much.

John Brennan

Thank you, Matt.

Operator

(Operator instructions). There are no further questions in queue at this time. I'd like to turn the call back over to Mr. Brennan for closing comments.

John Brennan

Well, thank you very much. We appreciate your questions and comments this morning. We believe we are in the run away track. I think we have realigned the business and as I said a few minutes ago, it's all about keeping cost under control, keeping – reserving cash and growing cash, and more importantly, growing the top line, which we believe will lead to the bottom line expansion over the next year or two and beyond. So we look forward to talking to you again at the end of July to talk about our second quarter performance and looking forward to reporting again continued incremental progress on our revenue and profitability. Thank you everybody.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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